Analysis: patent reform bill unable to clean up patent mess

With the Senate poised to take up the patent reform passed by the House last …

Fixing serious flaws

Last September, the House of Representatives approved the Patent Reform Act of 2007, legislation that would make important changes to America's patent system. With the legislation being fiercely debated behind closed doors in the Senate, Ars takes a closer look at the legislation's provisions, the major players in the debate, and the legislation's prospects for curing what ails the American patent system.

There are formidable forces arrayed on both sides of the patent debate. On one side are major technology firms who are concerned that the explosion of dubious patent litigation threatens their bottom line. Their interest has been piqued by recent eye-poppingawards to patent trolls. These companies want to make it more difficult for patent holders to extract large payouts from deep-pocketed firms. But at the same time, most hold large patent portfolios of their own, and are wary of changes that could cut too deeply into their licensing revenues.

On the other side are a variety of interest groups who benefit from the current patent system and are wary of changes that might reduce the profits of patent holders. These include the pharmaceutical industry, which feels well-served by existing patent rules. It also includes the patent bar, patent examiners, and other groups that are invested in the current process.

Despite the heated rhetoric on both sides, it is unclear if the legislation will do much to fix the most serious flaws in the patent system. A series of appeals court rulings in the 1990s greatly expanded patentable subject matter, making patents on software, business methods, and other abstract concepts unambiguously legal for the first time. The result has been a flood of patents of broad scope and dubious quality. With one very minor exception, none of the proposals being debated on the Hill would address these changes.

As a result, it may be hard for advocates for fundamental reform of the patent system to get too excited about this year's debates on the Hill. Although the legislation includes provisions that are likely to moderately reduce the toll that patents take on high-tech innovation, none of the proposals address the fundamental problems that have cropped up in recent years. Opponents of software patents, in particular, will find the provisions of the Patent Reform Act underwhelming. Their best hope is that the Supreme Court tackles the issue in the coming years. If that doesn't happen, then they will likely need to wait for the situation to deteriorate further before there will be sufficient political will for serious reforms.

Damage control

Probably the most important changes under consideration are reforms that would reduce the size of damages that could be awarded to successful plaintiffs in patent lawsuits. Two features of present patent laws have contributed to the astonishing size of recent damage awards. One is that when a patent covers one component of a complex product, courts have sometimes awarded damages based on the value of the entire product, even if the patent covers only a small aspect of that product. The other is the ability to win treble damages if patent infringement is found to be "willful." Both of these provisions increase the potential payoff to patent holders, encouraging more patenting and more patent litigation.

On the issue of apportionment of damages, both last fall's House legislation and the pending Senate bill dictate that when a patent covers only a portion of an invention and an appropriate royalty cannot be computed from existing licensing agreements, that damages should be calculated based on "the economic value of the infringement attributable to the claimed invention's specific contribution over the prior art." Advocates hope that this provision will prevent the holder of a patent on one part of a complex system from holding the entire system ransom.

Under patent law, infringement damages can be trebled if the court finds that infringement was done willfully. But critics charge that this rule causes many firms—especially in the software industry—to avoid looking at patents at all out of fear of heightened liability. Recent court decisions have reduced this problem somewhat, but both bills would go further by limiting findings of willful infringement to cases where the infringer had received specific written notice from the patentee, the infringer intentionally copied from the patent, or the infringer continued to infringe after losing in court. This would go a long way toward ensuring that software firms could conduct patent searches without fear of heightened liability.

Procedural reforms

The legislation would make a variety of changes to patent procedures that would be a big deal for patent lawyers, but may not have significant effects outside the patent bar. Possibly the most important change would be the creation of a new system for challenging patents after they've been granted. The patent office has had a limited reexamination process since 1981, but it has enjoyed broad discretion regarding the patents it chose to review. The Patent Reform Act would create a new "post-grant review" process that can be initiated by third parties. This process could provide a new avenue for striking down bad patents without the need for full-blown patent litigation.

Probably the most discussed procedural change is the switch from a first-to-invent to a first-to-file rule for granting patents. In most countries, the first person to file a patent application generally receives the patent, unless it can be shown that he copied the idea from another applicant. In contrast, the United States grants the patent to the first person to have developed the invention claimed in the patent, even if she wasn't the first person to file for the patent. This can cause administrative headaches for the patent office because it must sometimes conduct elaborate investigations to ascertain who was the true first inventor (although such "interference" proceedings occur for only a small fraction of patent applications). The Patent Reform Act would, for the first time, institute a first-to-file rule for granting patents, bringing the US into line with the rest of the world.

Another major procedural reform relates to disclosure. Traditionally, the patent application process has been secret, with only the applicant and Patent Office officials having access to pending applications. In 1999, Congress for the first time required disclosure of pending patent application 18 months after they were filed. But this requirement had an important limitation: it applied only to patents that were simultaneously being sought overseas, where such disclosures are common. The House and Senate bills drop the rule about foreign filing and require that, in most cases, applications should be disclosed within 18 months.

Trolls love purple

A final key procedural reform relates to venue shopping. Certain jurisdictions—especially the Eastern District of Texas—have become notorious for being sympathetic to plaintiffs in patent cases. As a result, a inordinate number of patent cases have found their way to East Texas courtrooms. The Patent Reform Act would rein in this abuse of jurisdictional rules by restricting plaintiffs' options when filing a patent lawsuit. While the House and Senate versions differ slightly, both would require that patent litigation occur in a location where either the plaintiff or the defendant have a significant presence.

The legislation does almost nothing to rein in the Federal Circuit's increasingly permissive attitude toward patents on abstract concepts like software, business methods, and mental processes. Only one provision of the Patent Reform Act addresses this issue: the House bill includes a prohibition on patents for tax planning methods.

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Timothy B. Lee / Timothy covers tech policy for Ars, with a particular focus on patent and copyright law, privacy, free speech, and open government. His writing has appeared in Slate, Reason, Wired, and the New York Times.